Turkey's economic woes hurt euro, emerging market currencies

People walk past an electronic board showing Japan's Nikkei average outside a brokerage in Tokyo

People walk past an electronic board showing Japan's Nikkei average outside a brokerage in Tokyo Japan

The Turkish Lira has slide rapidly since the United States slapped sanctions on two Turkish ministers, and extended its slide Monday morning to a new record low, at over 6.8 to USA dollar at the opening of European and Turkish markets.

The Lira has lost more that 45 percent of its value against dollar this year not only because of the latest diplomatic rift, bus also due to the Turkish economy showing signs of vulnerability after years of continued growth.

However, experts paint a bleaker picture, warning that global markets may face major ramifications as investors try to assess the impact of the crisis on European banks that have lent money to Turkey.

Nevertheless, traders anxious about the euro and emerging market currencies piled into yen and Swiss franc, which are seen as safe-haven currencies in times of market turbulence. Currency markets can also hasten these shifts, for example in 1992 when the United Kingdom crashed out of Europe's fixed currency regime, the Exchange Rate Mechanism, after sustained runs on sterling in currency markets.

"The Central Bank will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary", the TCMB said.

They said that could be the first step toward tightening policy via an interest rate corridor, an instrument used in previous years, rather than increasing the benchmark rate.

The bank said it cut the lira reserve requirement ratio, a cash buffer held by banks, by 250 basis points for all maturity brackets and lowered reserve requirement ratios for non-core FX liabilities by 400 bps for maturities up to three years.

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This will free up L10bn, and the equivalent of $3bn of gold liquidity in the financial system, the bank said. Central bank moves to boost liquidity provided little relief. The lira fell by a fifth against the dollar last week alone, but "even before the current crisis dropping, the lira was the world's worst performing currency, by nearly 50% against the dollar in the past 12 months", The Guardian reports.

"We will not give in", Erdogan said in a speech Sunday.

His comments on interest rates - and his recent appointment of his son-in-law as finance minister - have heightened perceptions that the central bank is not independent.

Turkish bank shares .XBANK fell to their lowest in dollar terms since November 2003 and their dollar bonds and sovereign dollar debt tumbled. European travel stocks were hard hit with TUI posting the worst performance of the British blue chip index, with a 4.3 percent fall.

Albayrak said in an interview published on Sunday that Turkey will start implementing an economic plan to ease investor concerns, stressing budget discipline and pledging that fiscal rules would be implemented for targeted indicators if necessary.

The lira's slide "may fuel volatility in emerging-market assets and dampen investor sentiment in the near term, as markets are already skittish", said Kerry Craig, global market strategist at J.P. Morgan Asset Management in Melbourne.

Erdogan, rejecting economic fundamentals as the cause of lira weakness, said Turkey was the target of an economic war.

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